What it means
Retirement accounts force money out on a schedule. Required minimum distributions start in your seventies whether you need the cash or not, sized from your account balance.
A qualifying longevity annuity contract bends that rule. Buy one inside your IRA or 401(k), and its value is removed from the balance used to compute those forced distributions until the annuity starts paying.
The IRS's instructions for Form 1098-Q define the qualifying contract precisely: an annuity bought from an insurance company under eligible plans, with premium limits, and distributions beginning no later than the month after the buyer's 85th birthday. The premium limit keeps the shelter proportionate: it is a dollar amount indexed over time, and earlier rules that also capped the premium at a percentage of the account were removed by later legislation, so savers can defer only a slice of their balance this way.
The design targets a specific fear: outliving money. Payments deferred to 85 are cheap to buy, because many buyers will not collect for long, which makes QLACs an efficient insurance policy against very old age.
The trade-offs are real. Money committed is illiquid, the annuity dies with the buyer unless a death benefit option is chosen, and inflation erodes fixed payments bought decades early.
The product sits between two worlds: it is longevity insurance wrapped in a tax rule, and it makes sense mainly for people with enough savings that forced distributions are a tax nuisance rather than needed income. For a non-finance reader, a QLAC answers one question: if you fear age 90 more than age 75, it lets you move some retirement money from the taxman's schedule to your own.
Advisers often pair a QLAC with the rest of the drawdown plan rather than letting it stand alone. The annuity covers the far years, which frees the remaining portfolio to be spent more confidently in the near ones.
Shopping matters as much as the decision itself. Payouts for identical premiums vary widely across insurers, and the contract's value is fixed at purchase, so timing and comparison carry real money.
In practice
Real-world examples.
Example
A 70-year-old moves 10% of her IRA into a QLAC, shrinking her required distributions for fifteen years. The tax relief begins years before the income does. She keeps the rest of her savings for spending and gifts.
Example
At 85, a buyer's QLAC begins monthly payments that cover assisted living costs for the rest of his life. The income arrives just as other savings may be running low. He no longer worries about outliving his portfolio.
Example
A couple selects the death benefit option so the premium returns to their estate if neither spouse reaches the annuity start date. The option lowers the eventual payout slightly. In return, their children are protected against an early loss of the premium.
Formula
Calculation
Premium limit: an indexed dollar cap, aggregated across accounts (set at $200,000 when legislation removed the earlier 25% of balance limit, and adjusted over time). Distributions must start by age 85, and the QLAC value leaves the RMD base until the annuity starting date.
Worked example. A fictional saver holds $900,000 in a traditional IRA and buys a QLAC for $135,000, which is within the cap. Use an illustrative RMD divisor of 26.5 and assume the balance is unchanged.
- Without the QLAC, the first RMD = $900,000 / 26.5 = $33,962.
- With the QLAC, the RMD base falls to $900,000 - $135,000 = $765,000, so the RMD = $765,000 / 26.5 = $28,868.
- The forced distribution falls by $33,962 - $28,868 = $5,094, which equals $135,000 / 26.5, and that amount stays in the retirement account's tax shelter until the annuity begins.Case study
Seen in the real world.
This case study is fictional and illustrative. A made-up retired engineer in Ohio holds $900,000 in a traditional IRA at age 70, with a pension covering daily needs. Her required distributions in her early seventies would push her into a higher bracket for money she does not need, while her real worry is funding care past 90, an age both her parents passed. She allocates $135,000, 15%, to a QLAC deferring to 85. Her RMD base drops immediately, trimming thousands a year in forced taxable income, and at 85 the contract begins paying about $38,000 annually for life, sized for care costs.
She chose the version with a return-of-premium death benefit so her children recover the stake if she dies before 85. Her planner's framing sold her: it is not an investment to beat, it is insurance against the one retirement outcome her spreadsheet could not fund. In the invented numbers, the lower RMD base cut her first forced distribution by about $5,094 a year, as the calculation above shows. Over the fifteen years to age 85 that deferral keeps more of the account in the tax shelter, while the contract's $38,000 a year at 85 means she would need to collect for about 3.6 years, since $135,000 / $38,000 is roughly 3.6, to recover the premium itself.
Watch out
Common mistakes.
- Treating a QLAC as liquid savings; the money is committed to the insurance company and cannot be reclaimed on demand. The insurer holds it now.
- Skipping the death benefit decision; without one, dying before the start date can forfeit the premium entirely.
- Buying with money needed for near-term distributions; the product suits balances large enough that RMDs exceed spending needs.
Questions
People also ask.
What is a QLAC?
A deferred annuity inside a retirement plan, excluded from required minimum distribution calculations, with payments beginning as late as age 85. The IRS recognises the contract and the tax base shrinks.
How much can go into one?
Premiums are limited to an indexed dollar cap, aggregated across eligible accounts. Check the current limit, because earlier percentage-of-balance limits were removed.
What happens if I die before payments start?
Without a chosen death benefit, the premium may be forfeited; with one, it returns to your beneficiaries, which is why the option matters.
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